Onex Bets on CLOs After Gain on Private Equity

Onex Corp. (OCX), whose shares have
reached a record on a surge of private-equity deals, is seeking
to expand in the credit business, including sales of
collateralized loan obligations.

“We’re very keen to continue growing that business,” said
Seth Mersky, senior managing director at Onex, Canada’s largest
publicly listed buyout firm, in phone interview on March 13.
“For the foreseeable future it will be dwarfed by the private
equity funds, but, that said, it will be an important source of
assets under management and fees.”

Toronto-based Onex has soared 28 percent over the past 12
months as of March 14, outstripping the 3.4 percent gain in the
benchmark Standard & Poor’s/TSX composite index. It closed at an
all-time high of C$47.63 on March 11, the highest close since
its initial offering in May 1987.

Onex was little changed to C$47.47 at the 4 p.m. close in
Toronto and has a market value of C$5.41 billion ($5.31
billion).

The firm, lead by Chief Executive Officer and founder Gerry Schwartz, acquired five businesses last year, guided Allison
Transmission Holdings Inc. to a $690 million initial public
offering that more than doubled Onex’s investment in the auto-
parts maker and raised $840 million in two CLOs, the company’s
first.

“They’re realizing their investments, the pipeline is full
and they’re raising more money, so they’re firing on all
cylinders,” said Jennifer Radman, a fund manager with Caldwell
Investment Management Ltd. in Toronto, who helps manage about
C$1 billion including Onex shares.

Lowest Costs

The company runs two main private equity funds -- the
large-cap Onex Partners funds which returned 17 percent last
year and the small-cap Oncap funds, which returned 23 percent in
the same period. It manages about $8.8 billion in total third-
party assets, including $1.8 billion in the Onex Credit Partners
debt unit, the company said in its year-end earnings.

Onex Credit raised about $840 million in two CLOs last year
while Citigroup Inc. raised an additional $512.1 million CLO for
the unit, said a person with direct knowledge of the deal who
asked not to be identified because the terms are private.

CLOs are a type of collateralized debt obligation that pool
high-yield, high-risk loans and slice them into securities of
varying risk and return. Money managers are raising CLOs at the
lowest borrowing costs since the financial crisis, increasing
the appeal of investment in high-yield loans and bonds Onex can
use as fodder for CLO creation.

Allison Transmission

“The credit markets have been very co-operative, but the
IPO markets for anything other than very sexy-growth companies
has not been,” Mersky said.

Merskey said he is optimistic the IPO market is picking up.
Companies have raised $6.79 billion in initial public offerings
in the U.S. this year, up 86 percent from the same period a year
ago, according to data compiled by Bloomberg.

In 2012, Onex guided Allison Transmission (ALSN) through an
initial public offering at $23 a share in March, compared with
Onex’s original cost of $8.44 a share. It also sold the Center
for Diagnostic Imaging Inc., based in Minneapolis in July, for
$145 million including a prior distribution, doubling its
initial investment of $73 million in 2005.

The company also opened up an office in London and invested
$1.4 billion to buy five businesses: SGS International, a
graphic services company; KraussMaffei AG, a German
manufacturer; USI Insurance Services, BBAM LP, a commercial jet
aircraft manager; and Bradshaw International Inc., a kitchen
products designer.

Growth Foundation

“These activities likely set the foundation for further
growth,” said Phil Hardie, analyst with Scotia Capital Inc., in
a note on Feb. 22 after Onex disclosed its fourth-quarter
earnings. “Onex was surprisingly busy in 2012.”

Onex reported profit of $39 million in 2012 compared with
$1.6 billion in 2011, which included $1.7 billion of earnings
relating to the sales of Husky International and Emergency
Medical Services Corporation. Revenue rose 11 percent to $27.4
billion.

Investing in Europe is a risk due to the ongoing credit
crisis and potential for flare ups, as seen with the recent
Italian election impasse, said Scott Chan, an analyst with
Canaccord Genuity, in a phone interview from Toronto.

“It’s a risk but you also see the better valuations in
Europe,” Chan said. “They won’t overpay for something. They’re
using a slow-and-steady process.”

Hiring staff

Onex is aware of the political situation in Europe, Mersky
said. The company has three employees in London, and is aiming
to hire two to three more staff, he said. The company employs
150 people globally, said Emilie Blouin, a spokeswoman with
Onex.

“Our hope is the political turmoil in their capital
markets will present opportunities to us and for us to buy the
types of businesses we buy over here,” Mersky said. “We’re
aware of the situation in Europe. It doesn’t mean good
businesses don’t become available.”

Radman does not expect Onex to repeat its stellar share
performance of the past year after such a flurry of activity,
instead estimating growth of 10 percent to 15 percent in a
quieter 2013 as the company fundraises and prepares its existing
holdings for sale.

“They tend to have strong years when they sell things,”
she said.

Historical Discount

Brandon Snow, a fund manager with CI Investments Inc.’s
Cambridge Advisors unit in Toronto who helps manage C$6 billion
and owns Onex shares, said Onex has persuaded analysts to view
it as an investment firm and not a holding company, which makes
the business less opaque and easier to value. This has helped
remove the historical discount to its net asset value, Snow
said. He said he hopes to be able to buy it at a better
valuation as “it’s had a good run.”

“This is one of the stocks where I’d be fine plunking it
into a portfolio and leaving it for 10 years,” Caldwell’s
Radman said. “They’re professional money managers and you’re
getting what the biggest pension funds in the country are
getting, without any of the costs. You just own the stock. It’s
a no-brainer.”